What looked to be some significant headwinds in the log export market heading into next year have turned with supply into China down and demand up.
There are a number of factors at play here which have resulted in the in-market inventory of logs and lumber in China reducing to the lowest point in many years, in-turn, affecting a rapid and positive impact on the sale price of logs.
China halted the imports of many products from Victoria and Queensland in November due to a "biosecurity issue". This has manifested into a widespread ban on the import of products from across Australia, including logs and lumber.
It's plainly obvious that this situation is more about trade tensions between the two countries than biosecurity. We are watching this with a close eye as the wrong comment at government level could see NZ dragged into the dispute which would obviously be devastating to our economy.
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While Australia are not massive players in the log export market, they do produce around 400,000m3 per month mainly destined for China which now must find a new home, more than likely Korea and Indonesia.
The anticipated influx of beetle-damaged logs from Europe has not gathered momentum as Covid-19 has reduced the demand for containers from China which are used to back-load logs. This combined with a recent sharp increase in container freight costs has kept a lid on Europe's ability to be competitive with volume from other supply points. In addition, Russian president Vladimir Putin announced a complete ban on the shipments of unprocessed or roughly processed conifer and hardwood by January 1, 2022. While the impact of this will not be immediately felt, it has supported positive market sentiment.
Current log inventory in China is sitting at a shade under 3 million cubic metres which is around five weeks' supply and low enough to cause concern for buyers. We have seen price increases of $8/JAS in December with A grade now at an average price of $135/JAS across all ports. This is with the NZ dollar at a 30-month high. It is likely that there will be further upwards movement coming into early 2021, especially if Chinese inventories remain low. However, history dictates that at levels above $140/JAS generally lead to significant price volatility as other supply points become economically viable into China.
Domestic markets remain very buoyant which is no surprise considering the heat in the housing market at present. Pruned and sawlog prices will likely see increases in early 2021 and many sawmills are running on very low log inventories. As many of the sawmills in the southern North Island source a large proportion of their supply from woodlots or smaller private forests, there is more volatility in the supply mix between pruned and framing grade logs. This is going to be more relevant going forward as many forest owners opt out of pruning in favour of an unpruned or "framing regime".
The question of whether to prune or not is one of the most common questions asked by our clients. Putting it in purely financial terms, a forest in the Whanganui/Manawatū region will show a very similar IRR (around 6.3 per cent) under both pruned and framing regimes. The return is heavily influenced by distance to the various markets and it is very hard to predict what sawmills will be around in 25 years' time. The decision comes down to available cashflow at the start of the rotation and suitability of the site. In round figures you will spend around $5500 per hectare including establishment costs on a pruned regime in the first 10 years whereas for a framing stand that figure is around $2750 or roughly half. When it comes time to harvest, your pruned forest will return you around 35 per cent more net revenue than the framing forest.
You don't have to stick wholly to one regime or the other and a mix of the two may be the best solution for the site. Pruned forests have a lower stocking rate than framing forests (330 vs 500 trees per hectare) so are more suited to less exposed areas with higher fertility as it is imperative to grow the pruned log to minimum diameter specifications. Whether you are establishing a new forest or replanting a cut-over block your best bet is to seek professional advice from a forest manager who can assist with your regime choice.